What happens to Ukraine's budget funding if the EU fails to approve its €50bn support package?

What happens to Ukraine's budget funding if the EU fails to approve its €50bn support package?
Financial aid from the US is already in decline, but passing the EU's mooted €50bn aid package will also be difficult. What happens if EU leaders reject it? / bne IntelliNews
By bne IntelliNews November 24, 2023

Half of Ukraine’s 2024 budget deficit will have to be funded by international partners, but with money from the US already in decline, what will happen to Ukraine’s government finances if the EU also fails to approve its mooted four-year €50bn support package?

The passage of the support package is not a done deal. EU leaders are due to consider it at the bloc’s upcoming summit on December 14-15. The largest part – €39bn – is dedicated to supporting the budget to keep the government running. If that amount is divided into equal parts, you get €9.75bn annually, UBN reports.

This will not be enough for next year’s needs, according to analysts, so the government and the Ministry of Finance are reportedly negotiating with the European Commission to receive almost twice as much, €16-€18bn, from this €39bn next year.

And the upcoming talks increasingly look like they will be fraught, especially over the matter of Ukraine’s accession to the EU.

Those talks will be "difficult", European Council President Charles Michel said on November 22, as some EU members, especially those from Central Europe, grapple with a number of issues, including Ukraine’s agricultural imports and the cost of funding the war with Russia.

Moreover, Hungarian Prime Minister Viktor Orban has become increasingly aggressive in recent weeks, calling for the €50bn programme to be halved and declaring this week that “Russia cannot be defeated” and that an immediate ceasefire should be imposed on the fighting in Ukraine. Budapest is particularly peeved by a language law that bans teaching in Hungarian in schools for the Hungarian ethnic minority in western Ukraine.

If the EU doesn’t agree to double its allocation next year, Ukraine will have to cut funding for state programmes, according to the head of the Budget Committee of the Ukrainian Parliament, Roksolana Pidlasa. Ukrainian officials have said recently the government could probably cope with a shortfall in funding of between €5bn-€10bn, but not more.

Funding cuts may affect business support programs, capital expenditures may be reduced, and tax redistribution in favour of the state budget may have to continue.

"Discussions on redistributing taxes from local to state budgets will continue," Pidlasa said.

EU members are also under funding pressure as their economies slow thanks to the pandemic-induced polycrisis that has been made worse by the war in Ukraine.

Germany was plunged into a budget crisis this week after the Constitutional Court ruled that Chancellor Olaf Scholz could not transfer €60bn from a pandemic relief fund to the climate crisis fund, forcing the government to temporarily halt all new programmes. However, Berlin is likely to continue support for Ukraine that has already been earmarked.

The EC is considering all possible options to finance and support Ukraine but hopes that the EU Council will approve the €50bn Ukrainian fund, which will provide funds to Kyiv from 2024 to 2027, EC Executive Vice President Valdis Dombrovskis said this week.

He noted that, in any case, Ukraine’s financing deficit will “probably remain huge”. Therefore, the EU needs to move quickly to adopt the Ukrainian funding package “since the deadlines are very tight”, and the new payments should start at the beginning of January.

In the meantime, EU funding continues to flow into Kyiv. EC President Ursula von der Leyen announced on November 22 that the 10th disbursement of €1.5bn in macroeconomic assistance for Ukraine from this year’s allocation has already been sent.

The need for international financing for 2024 is $41bn, UBN says. The US is expected to allocate $8.5bn, the IMF $5.4bn, Canada $1.9bn and Japan $4.5bn.

But Ukraine’s US funding is increasingly in doubt as “Ukraine fatigue” mounts in Washington. The Pentagon recently said it has some $1bn left from previous allocations for military supplies, and the Biden administration said that there is a total of $5bn left from previous allocations for general support.

However, some pro-Ukrainian US politicians worry that if President Joe Biden’s proposed $106bn support package, which includes $61bn of aid for Ukraine, is not approved in the three weeks between Thanksgiving and the start of the Christmas break then Ukraine could face a shortage of ammunition as the worst of the winter weather sets in. Ukrainian President Volodymyr Zelenskiy recently said that supplies of the crucial 155mm shells from the US have dropped since the war in Israel broke out on October 7.